February RIA Roundup: The Housing Shortage
The RIA Roundup is a monthly real estate newsletter with the latest stories, data, and insights curated especially for rental property investors.
In this issue:
Lead Story: The Housing Shortage
Portfolio Updates
In Other News…
Final Thoughts: War
Lead Story: The Housing Shortage
Here’s a fact that may surprise you: there aren’t enough homes in the United States, and there haven’t been for 15 years.
How do we know this? Well, because tons of people have studied the issue. Various studies have tried to put a number to the shortage, and though there is a broad range of estimates — anywhere from 2M to 6.8M housing units — basically everyone agrees that there aren’t enough homes.
We also know this because we have built fewer homes in the last 15 years than during any such period in modern history. If that doesn’t seem right to you — what about that new development near me? — this is one area where you should not trust your instincts, and instead rely on the numbers:
In the last six decades, we have typically built about 1.5M homes in a typical year. We kept building homes because we kept adding people — over those same six decades, the U.S. population nearly doubled, from 175M in 1960 to 340M today. And throughout most of this time, the ratio of population growth to new homes built was pretty stable at about 2:1. In other words, for every two people added, one new home was built.
But when the Great Recession hit, the rate of new home construction crashed, and that ratio grew to more than 5:1. This ratio continued to be way above historical averages for many years after the recession was over, creating a significant and widespread shortage of housing that persists to this day.
But wait — it looks like the rate of home construction has now fully recovered to historical averages. Doesn’t that mean we’re out of the woods?
Well, no. For one, we would need to tip the scales in the opposite direction for many years to overcome the housing deficit we created in the last decade. We didn’t return to that golden ration of one home for every two new people until 2018, which means that for 10 full years we were ADDING to the housing shortage. There was a bit of good news in 2019 and 2020, though — new home construction continued to increase, while the rate of population increase slowed:
Well, there you have it, we’ll have this housing shortage knocked out in no time! Right?
Nope, doesn’t look that way. Because homebuilders have once again begun to pull back dramatically, in response to falling demand caused by higher mortgage rates, and by broader recession fears. Here’s what has happened to housing starts in the 12 months leading up to November 2022 (and the trend has not improved since then):
So we once again find ourselves in a situation where we’re building dramatically fewer homes than we should be. We don’t know how long that will persist, but so long as it does, the housing shortage cannot be solved.
In addition to the skittishness of homebuilders, persistent NIMBY-ism (“not in my back yard-ism”) at the state and local level also continues to be a hindrance to the construction of more housing units. In rapidly growing areas, the economy would naturally create incentives for housing to get more dense, such as with the creation of multi-family structures. But many localities, driven by the desires of residents to maintain the neighborhoods they love and to protect their own home values, strongly resist that kind of new construction. With the need for new housing unmet, the inevitable result is an increase in home prices, more or less tracking the simple supply and demand rules we all learned in high school economics classes.
In short: our inability to build enough new homes is a significant contributor to the outsized increases in home prices we have seen since the Great Recession. But unaffordable housing isn’t the only result of the housing shortage — it likely contributes to myriad other problems, including inequality, low birth rates, and climate change.
And yet, despite all this, many people still oppose the most obvious solution to the problem: building lots more housing. This is due to NIMBY-ism, yes, but it may also be influenced by people’s inability to accurately conceptualize market dynamics in housing, as explored in this excellent article.
This is an issue that will have to be addressed community by community, not at the national level. Activism and awareness on this issue is increasing, and is starting to achieve small successes in some localities. In particular, housing advocates are hoping to loosen or eliminate zoning restrictions prohibiting the construction of higher density residential structures where they are warranted.
You might be wondering why I, as a real estate investor, would be arguing for such a solution. After all, isn’t the housing shortage in my best financial interests? Yes, it certainly is. In fact, I’ve previously noted the housing shortage as one of the factors placing a floor on the real estate market, limiting how far prices can truly fall. And the lack of housing has a similar impact on rental rates, because too many renters competing for too few homes creates upward price pressures on rent.
But ultimately, I care more about the country than I do about maximizing my investment returns. (Which seems pretty obvious and unavoidable when you say it like that, right?) The solution to our massive housing shortage is to build more houses, and that’s exactly what we should do.
Portfolio Updates
I recently published my January Portfolio Report to kick off 2023. It was a solid start to the year: my properties produced over $10,000 in net cash flow, which exceeded my projected target by nearly $2K:
I also published Property Spotlights for the rest of the new properties in my portfolio that I purchased since last fall. Check out Property #23, Property #24, and Property #25. That will be it for new acquisitions for a while (phew).
I do have a couple of vacancies at the moment. First, I’m still in search for a tenant for Property #25 — it has already been nearly two months since I closed, so I’m anxious to get that property leased. On top of that, the tenant at Property #4 turned in their keys (a few months before their lease expiration) due to personal matters. So I’ll soon be embarking on the first turn of 2023 at that house, and be looking for a new tenant there as well.
In Other News…
A rule change for 529 college savings plans. Starting in 2024, a new rule will allow unused funds in a 529 college savings account to be rolled over into the beneficiary’s Roth IRA with no penalty, eliminating one of the big downsides of 529 plans. Previously, a 10% penalty and income taxes would have applied in this situation.
4-day workweek wins favor in the U.K. The results of the largest study ever done on a 4-day workweek are in: both employees and employers liked it. More than 90% of the companies in the study are sticking with the 4-day schedule…for now. It’s worth noting, however, that people have been predicting and expecting the 4-day workweek to take hold for nearly 100 years. As you head to work on Friday, you’ll be reminded that these predictions have been consistently wrong.
Tax avoidance continues to plague the U.S. Large corporations and the wealthiest citizens have gotten increasingly sophisticated at avoiding (or even evading) paying their fair share of taxes. One of my favorite writers and commentators, Scott Galloway, takes a deep dive into this topic here. I guarantee that it will surprise and alarm you. But there is good news: the influx of funding for the IRS that became law as part of the Inflation Reduction Act has already begun to show positive results.
SCOTUS hears debt forgiveness case. In oral arguments, the Supreme Court seemed skeptical of President Biden’s plan to forgive student debt without Congressional action. The plan would forgive up to $20,000 in student loans for ~40 million Americans.
Inflation has even hit the Tooth Fairy. Good news for 9-year olds: the going price for a lost tooth has increased significantly in recent years, and now stands at over $6. (It really makes you wonder how the Tooth Fairy finances this whole enterprise, doesn’t it?)
Two Mars employees fall in a vat of chocolate. Yes, this is a real story. If you are anywhere near my age, this will immediately conjure the image of Augustus Gloop falling into the chocolate river and being sucked through those pipes at the chocolate factory, with Gene Wilder as Willy Wonka dispassionately observing it all. Man, that is a creepy movie!
Chinese spy balloon is shot down. In what has to be one of the weirder international news stories in recent memory, the U.S. detected a spy balloon that had been launched from China; China denied it a was a spy balloon, which was a stupid things to do because in fact we already KNEW it was a spy balloon (gotcha!); and then we shot it down. Then for a week or so, we were shooting down balloons all over the place. If you’re planning a hot-air balloon ride in the near future, might be worth re-considering that.
Some sports stuff happened. LeBron James became the NBA’s all-time leading scorer, surpassing Kareem Abdul-Jabbar’s record. Major League Baseball implemented a pitch clock and other measures to speed up the game, which already appear to be working. And one of the better Super Bowl games in history was won by the Kansas City Chiefs. (Also, Elon Musk was there. Guess he’s done fixing Twitter!)
Dilbert cartoon removed from newspapers. Scott Adams, the creator of the Dilbert comic strip, delivered an eye-poppingly racist tirade and promptly had his cartoon removed from newspapers all over the country. He seemed to know, even while doing it, that this would be the inevitable result of his rant, so I guess he did it just to prove a point? Who knows. But if his point was that nobody reads the comics anymore, then…point taken, sir, point taken. (Also, Elon Musk saw fit to chime in with his support for Adams, accusing the media of being “racist against whites". This is pretty nutty stuff, of course, but it’s also just amazing that he can stay so plugged in to current events given how busy he is running his companies and saving the world and all. I mean, where does he find the time?!)
Tesla’s first investor day flops. Elon Musk held the first-ever investor day for Tesla, which seemed loosely modeled on the annual Apple events that Steve Jobs utilized to masterfully orchestrate media attention on his company and products. Musk didn’t fare nearly so well: investors were underwhelmed by the presentation, which included no major announcements and focused on cost-cutting, and Tesla stock promptly dropped 5%. (Maybe Elon should have focused more on this and less on going to the Super Bowl, defending racists comic strip authors, and destroying Twitter.)
ChatGPT got weird. A month ago, we were all intrigued, then a bit scared, by the capabilities of ChatGPT, an AI that could churn out perfect prose on just about any topic. But this month, things got weird fast when more people started interacting with the tool, as the AI displayed some troubling tendencies including gaslighting, mischief, violence, and wild emotional swings from obsessive love to existential depression. So it’s basically a hormonal teenager with access to all digital knowledge…which….doesn’t seem great.
Early galaxies detected that are way too large. The stupendously cool James Web Space Telescope has detected galaxies in the early universe that are way bigger than anyone expected them to be, which upends a lot of what we thought we knew about how the universe developed in its first one billion years. It’s one of those rare “this isn’t at all what we expected to find, and we have no explanation for it yet” kind of moments in science, which are always the most fun.
Breakthrough antibiotic discovered. Humanity is in dire need of new antibiotic drugs to combat the worrying rise of multi-drug-resistant bacteria, sometimes called “super bugs”. Good news: we just found one.
Final Thoughts: War
The recent one-year anniversary of Russia’s invasion of Ukraine prompted lots of media stories about the war: why and how it started; Russia’s surprising failure to achieve any of its strategic objectives so far; Ukraine’s scrappy and heroic military performance in defense of their homeland; and of course how the conflict has affected the rest of the world — geopolitically, economically, and now militarily, as NATO and China appear increasingly to be proxy players standing behind Ukraine and Russia, respectively.
But more than anything, these retrospectives reinforce facts about all wars since World War II that we should have learned by now — namely, that they tend to be longer, more costly, more deadly, and less useful than anyone imagines at the outset. We’re forced to wonder if Putin would have proceeded with the invasion if he knew that he’d be locked in a bloody, intractable stalemate in eastern Ukraine a year later, with hundreds of thousands of casualties requiring him to draft 300,000 civilians (cannon fodder) into service, and the Russian economy in peril thanks to severe ongoing international sanctions. Whatever you think about the war, one thing is increasingly clear: nobody is winning it.
At home, we’re mercifully shielded from direct contact with the war zone, a luxury that 40 million Ukrainian citizens (and countless others in various parts of the world) do not have. But we’ve become just as committed to another kind of war: the so-called “culture war”. And while there are no bombs or missiles in this war, it is nonetheless doing extraordinary damage of its own kind.
You’re probably familiar with the outlines of this conflict, at least as they’re usually described (or caricatured): Democrats vs. Republicans; proggressives vs. conservatives; coastal elites vs. flyover country; multi-racial vs. white; the woke mob vs. MAGA extremists. These easy dichotomies obscure nuance, and ignore many people whose views don’t neatly align into either camp — and yet, there is some truth to them. Numerous major policy issues serve as reliable litmus tests for which group you tend to side with, be it abortion, gun rights, immigration, and more.
There has always been political conflict in America, and in certain ways that’s healthy. But it wasn’t until sometime in the mid-20th century that the modern camps began to take shape in a way that we’d recognize today — and it was also around this time that the American right began to focus on the dangers of the left as one of their recurring talking points. (This was very much a strategy, as has been thoroughly discussed by many political scientists, such as here and here and here.) This “demonization” has cycled through many familiar labels over the years — dirty words meant to smear their opponents: liberal, tree-hugger, leftist, socialist, politically correct, bleeding-heart, snowflake, and the most recent term du jour, “woke”. Meanwhile, the left had no love for the right either, and did their own share of insulting and name-calling.
But when the conflict between these political camps becomes completely divorced from POLICY — which, after all, is what politics is all about — it ceases to be healthy. It leads to conflict being pursued not in the service of some policy objective, but for its own sake, for point-scoring, for grandstanding, for clicks and likes and media attention, for “owning the libs”, for beating the the side. Meanwhile, citizens are left wondering why the roads are falling apart, why nobody picks up the phone at the IRS, why their prescription drugs are so expensive, and why their elected officials never seem to get anything done to solve these and myriad other problems that affect them directly.
Without doubt, we’ve now crossed over into this post-policy world. The commitment to a culture war — particularly, it must be said, on the right — seems to have fully eclipsed any meaningful policy goals that would historically have been lassoed to such disagreements. The last several years have seen the right become fixated on things like Dr. Suess books, Mr. Potato Head, M&Ms spokescandies, which bathrooms people should use, gas stoves, and a long list of other topics that seem pretty far removed from the issues that most people would want government to focus on.
And if you’re thinking that this is just a cable news phenomenon, think again. It has fully infiltrated the halls of Congress and many statehouses. A recent law passed in Tennessee — a state I’m heavily invested in (literally) because my entire rental property portfolio is there — illustrates this point quite clearly. The Republican-controlled legislature there recently passed a bill, signed into law by the Republican governor, that will ban drag shows. (Yes, really — and in fact, many other states are following suit, including Kentucky.) They say these laws are meant to “protect kids”, but this is a transparently nonsensical justification, since parents could easily avoid drag shows if they didn’t want their kids seeing them. One does not simply stumble into a drag show unawares.
Rather, the laws are plainly an attack on LGBTQ people to score political points, and to virtue-signal to the evangelical base of the Republican Party. (It’s not clear to me that this will be an effective strategy, given the increasingly broad popularity of drag. Also, someone should ask these legislators how this law comports with their often-stated commitment to small government and individual freedoms.)
Anyway — the negative impact on drag performers is important, but surprisingly, isn’t the main point here. The bigger tragedy is that the culture war has so infected the body politic that the government of Tennessee thinks the most important thing they can do to protect their kids is to ban drag shows. (Or maybe they don’t truly believe this, but they pretend to believe it for a perceived personal political benefit, which is just as bad.)
Maybe you’re no fan of drag shows, and you think those laws are fine. Fair enough. But even if that describes you, there is still a problem — because in the end, there is a huge opportunity cost to these culture wars. If government spends time on this stuff, they are by definition NOT spending time on other stuff, and there’s only so much stuff they can get done. What else might they do? Well, here are some stats about Tennessee that would concern me much more than drag shows if I were a legislator there:
Out of 50 states, Tennessee is ranked 42nd for crime
Ranked 40th in education
Ranked 39th in poverty
Ranked 37th in health care access
Needless to say, the kids of Tennessee are facing far bigger challenges than the existence of drag shows.
Like the war in Ukraine, there are no winners in this culture war, while the list of losers is long. With respect to this specific Tennessee law, that list includes drag performers, the LGBTQ community at large, theaters and performing venues, adjacent businesses that provide costumes, jewelry, make-up, choreography, and more to drag performers — and most importantly, citizens and businesses all over Tennessee who would benefit materially if government focused more on governing, and less on an unwinnable culture war.
Ukraine’s fight may be heroic, but in our culture war at home, it’s time to lay down our arms — and demand that our elected leaders do their jobs.
Happy investing,
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
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